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How I’d invest in real estate to generate passive income

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I want my passive income stream to be truly passive. This should mean I don’t have to put in extra hours of work, and that my investments work for me all year round.

Real estate might not be a first choice for someone looking to generate passive income. A rental property would require the management of tenants, potential repairs, and other tasks, so I don’t consider this to be truly passive.

But there’s another option I could use to invest in the property market. Let’s take a look at how I can generate passive income using real estate investment trusts (REITs), and what ones I’m considering for my portfolio.

Real estate investment trusts

REITs are investment companies that own and manage a portfolio of real estate. For a company to be classified as a REIT, it must pay out at least 90% of its taxable income to shareholders. REITs also have preferential taxation as business profits are exempt from tax. This combination can lead to attractive dividend yields for investors like me.

There are other benefits to investing in REITs in my portfolio. I can buy shares of a REIT just like any other company trading on a stock exchange. In doing so, I can buy and sell my real estate investments much easier than physical rental property. However, this comes with added risk as my REIT shares will be more volatile, just like other equity investments.

Growing my passive income

I’ve been screening for potential REITs to generate passive income. There has been a divergence in performance during the pandemic in that retail and leisure REITs have underperformed while specialist property sectors such as industrial and warehousing have surged in price.

With this in mind, a retail and leisure REIT that looks good value today is NewRiver. Its recent half-year results showed that business conditions are improving and the dividend is being increased.

In the specialist property sector, Tritax Big Box, Urban Logistics, and Warehouse are all REITs I’d consider for my portfolio to generate passive income. I think these companies are well positioned to take advantage of the growing e-commerce industry as they manage prime warehouse and logistics centres.

I also like the look of Supermarket Income REIT, which manages a property portfolio that is rented to established supermarket brands. It aims to provide shareholders with an inflation-linked income stream. With the prospect of rising inflation in 2022, this REIT may help to protect my income stream.

With any investment there are always risks to consider, and REITs are no different. As mentioned, shares of REITs can be volatile as they trade on a stock exchange like any other company. Any REIT that I buy must remain profitable for it to pay out at least the 90% of its taxable income too. So any repeat of a Covid-related lockdown may reduce my passive income from REIT investments.

But on balance, I’m considering buying REITs for my portfolio to diversify my passive income.

The post How I’d invest in real estate to generate passive income appeared first on The Motley Fool UK.

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Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Tritax Big Box REIT and Warehouse REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.